Fed and BoE to markets: pay attention to pay

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It is more than a bit ironic that those paid the most to pay attention to incoming data arenâ€™t paying enough attention to pay.

Both Bank of England Governor Mark Carney and Federal Reserve Chair Janet Yellen have dropped many hints in speeches and public policy statements over the past several months that wage inflation likely will play an important role in any decision to raise interest rates.

Much like a central banker would do in the days before the financial crisis, now Carney says the data will dictate where rates will go.

And judging by the data, the first rate hike from record lows is still a long way off.

Short sterling interest rate futures traders were busy on Tuesday ramping up expectations for an early UK interest rate hike, perhaps for later this year.

That was based on a surprise rise in inflation, driven mainly by the fact an early British summer has emboldened many clothing retailers from delivering the same kinds of discounts they did last year, including footwear.

So they were flip-flopping over the price of flip-flops in June.

But data expected on Wednesday are likely to show very weak pay rises, despite an improving job market.

Indeed, average earnings growth is expected to slip to 0.5 percent in the three months to May on a year ago, from an already weak 0.7 percent.

The story is similar in the U.S., where June retail sales disappointed despite solid rises in consumer credit.

At present, wage gains continue to proceed at a historically slow pace in this recovery, with few signs of a broad-based acceleration. As the extent of slack we see today diminishes, however, the FOMC will need to monitor these and other labor market indicators closely to judge how much slack remains and, therefore, how accommodative monetary policy should be.

In testimony to Congress on Tuesday, Yellen sounded a similar refrain:

Labor force participation appears weaker than one would expect based on the aging of the population and the level of unemployment. These and other indications that significant slack remains in labor markets are corroborated by the continued slow pace of growth in most measures of hourly compensation.